Global equity markets began the month with the negative sentiment (-0.8% in US, -1.1% in Europe, -1.5% in Asia) as US leading indicators showed a slowdown in growth (June ISM manufacturing fell to 56.2 from 59.7 in May, contracts to buy existing home fell 30% in May). China data also pointed to slowdown (June PMI fell to 52.1 from 53.9 in May), amid uncertainties regarding Europe’s debts and austerity programs.

Market sentiment turned positive and stocks rallied from the second week thru month end (+7.0% in US, +12.5% in Europe, +6.0% in Asia) supported by a) better-than-expected profits by US banks and other companies (aluminum maker Alcoa, railroad operator CSX Corp, Intel, IBM, Apple, Caterpillar, UPS, 3M, AT&T, etc.); b) European banks passing their stress test (only 7 out of 91 banks in 20 countries failed); and c) China released data on risks to bank loans that were significantly lower than market estimates and that the majority of loans could be repaid without problems. Based on this information, investors are looking for policy easing and loosening of property tightening measures before year-end.

The SET index also rallied following global equity markets, ended the month up 7.9%, and was the third best performing market in Asia following China (+12.0%) and Singapore (+8.3%), mainly supported by political tension easing and positive economic and company-specific data in both exports and domestic consumption.

Investee Company News

Thai stock prices this year have so far advanced on the resolution of political tension and a return to normal shopping patterns by Thai consumers. However, we believe that prices are just beginning to reflect extremely good 2Q10 company results and a rapidly improving outlook for Thai company earnings over the next 2 to 3 years. In short, it’s not too late to add to your investment to catch this second surge in prices.

Indorama Ventures (IVL), our largest holding in the fund, mentioned at yesterday’s analyst meeting that they expect to more than triple their sales by year end 2014 with EBITDA margins at least as good as today and net margins substantially better due to economies of scale. We have been expecting only a doubling in sales, so this was great news.

Improvement in domestic consumption was confirmed by one of our property holdings, Pruksa Real Estate PLC (PS), which revised its 2010 presale target from THB29 billion to THB35 billion (+21%), an increase of 54% from the previous year, due to its impressive presales in 1H10 of THB20 billion. PS’s first overseas project in the Maldives was also successful, with 90% of its units in the 1st phase launch sold within a week. PS plans to launch another 64 projects in Thailand, 1 in Vietnam, and 1 or 2 in India. The management is very confident that PS can reach its 25% growth per year in the next 4 years in Thailand, while PS is building up its oversea sales to support its long-term continuing 25% growth target in order to reach sales of THB100 billion in 2017 (from THB24 billion in 2010). Currently, PS is trading at 11.2x 2011 earnings.

Meanwhile, we have increased exposure to one of our electronics holdings, KCE Electronics PLC (KCE, a printed circuit board manufacturer). KCE informed us that the company is currently running at full speed and has received more orders from both existing and new customers. As a result, KCE will invest US$6 million to increase capacity by 15% , which will generate an additional US$30 million in top line and contribute approximately US$8 million in bottom line, or an EPS increase of 33% with a payback of less than 1 year, due to no additional fixed/administration costs. Currently, KCE is trading at 4.6x 2011 earnings

Somboon Automotive (SAT) moved higher in July based on an announcement by automakers (Ford Motor Co., General Motors Co., and Mitsubishi Motors Corp) to build new factories in Thailand. Thailand is the world’s largest producer of one-ton pick-up truck and an export hub for cars and pick-ups to Southeast Asia and Australia. Toyota to move production of sedans including the Camry to Thailand, and several global car makers will open new production on Eco-car models during 2011-2012 (Honda starting in 2011, Toyata, Mitsubishi and Suzuki plan to operate in 2012).

For the month, our fund underperformed the SET index. Three out of our seven heavily weighted sectors outperformed their respective benchmarks. Most sectors, except the petrochemical sector, made gains and the main contribution came from our property and electronics holdings.

Thailand’s 1H10 GDP growth is also the third best in Asia (+10.0%), following Singapore (+17.8%) and China (+11.1%). Thailand remains the second cheapest market in Asia, offering PER of 10.6x 2011(with EPS growth of 16.8%) and the second highest dividend yield (3.6%) in the region, based on Bloomberg data. In comparison to other Asian markets, the Thai market is trading at 15.2% discount to the average PER of regional markets (12.5x 2011 PER with an average EPS growth of 12.4%). In contrast, our fund is trading at PER of 8.8x 2011 with weighted EPS growth of 28.4%.

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In local political news, despite some stability, the political outlook is not totally smooth. After the government appointed three committees to head the Reform Thailand Panel under the reconciliation road map, one of three committees, National Reform Committee (NRC) led by former Prime Minister Anand Panyarachun and human rights groups urged the government to end the state of emergency (covering 19 provinces in the north and northeast areas and Bangkok) because it would have a negative effect on national reconciliation and it is also against democratic principles. This emergency decree, imposed since April 7, aims to control the anti-government group (red shirt protesters and their leaders), including banning political gatherings of more than 5 people, shutting down red-shirt media outlets in order to prohibit the spread of disinformation or news, and freezing the assets of the red-shirt supporters. Meanwhile, this decree also allows security officials to violate basic rights.

On July 20, the government lifted the use of the emergency decree in 3 provinces because the situation in these areas has returned to normal according to the recommendation of the Centre for the Resolution of the Emergency Situation (CRES), while the remaining 16 provinces still have some movements against the government. On July 25, there was a bomb blast at the shopping and business area in Bangkok, which ended hopes for lifting the emergency decree in Bangkok. To lift the emergency decree, the authorities will consider and judge on the following criteria: political gatherings, use of media to incite opposition, movements from outside Thailand that implant wrong thinking, and threat to the government and other officials.

Meanwhile, to win popularity and convince some voters in these areas to be their supporters, the government is promoting a series of populist programs to boost the fortunes of lower income Thais, including; 1) National Savings Fund: helps tens of millions of Thais set up retirement funds with matching government grants; 2) Income Guarantee for Farmers: payments for several million farmers to ensure they get at least minimum returns on crops; 3) Debt Reduction: use refinancing to lower debt payments for hundreds of thousands of borrowers; and 4) Microfinance: push Thai banks to extend credit to lower-income areas.

On the economic front, both the International Monetary Fund (IMF) and the Bank of Thailand (BOT) raised their economic growth forecasts for Thailand. IMF foresees Thailand’s real GDP rising 7.0%-8.0% in 2010, up from its previous projection of 7.0%, due to high export income and robust growth in Asia.

The Bank of Thailand (BOT) has revised upward its economic growth forecast for 2010 to 6.5%-7.5% from its previous forecast at 4.3%-5.8% supported by strong export growth (Thailand’s key economic engine) and limited political impact. BOT expects growth momentum will continue in the second half, but with some risks, particularly uncertainties over global recovery, which could slow down exports. Meanwhile, BOT lowered headline CPI forecast from 4.0% to 3.2%, partly from the subsidy of government cost of living program (free electricity, free public bus, freeze the price of natural gas for vehicles (NGV) and cooking gas (LPG)). Core CPI forecast was also trimmed from previous 1.5% to 0.9%.

Thailand’s exports in June continued the eighth consecutive month of growth, due to an improvement in manufactured products and major crop production. Exports increased 47.1% y-o-y in June (the largest export increase in 23 months) to US$17.9 billion, a new high record. Manufactured products rose 48.5% y-o-y and agricultural sales increased 29.5% y-o-y. In addition, manufacturing production continued to show signs of improvement in electronics, electrical appliances, automobiles and furniture. The trade account balance showed a surplus of US$2,535.9 million, due to a 38.3% increase in import value to US$15.3 billion, mainly from a 54.0% increase in intermediate products and raw materials and a 48.3% increase in capital goods. The current account posted a US$681 million surplus versus a US$1,039 million surplus in May.

The SET’s trading activity increased 40.7% in July, from US$661 million to US$930 million of average daily volume. Foreigners were net buyers of US$213 million in July, but still remained net sellers of US$324 million year to date. Retail investors are less bearish this month, with participation at 66% (from 63% previous month). Foreigners and domestic mutual funds accounted for the remaining 16% and 18% of volume, respectively.
  

If you would like to discuss our performance and/or strategy, please give Katekao, Sergej or me a call at 662-255-2040.

Doug Barnett